In June, the S&P 500 Index returned -2.4%, its worst month since January, 2014.
Several other markets around the world also experienced difficulties in June, such as the FTSE 100 which was down 6.6%. The Shanghai stock market has dropped nearly 25% from its recent high on June 12.
In the US, REITs were the best performing asset class in 2014. This year they’re off 6% through the end of June.
US Treasury bonds have also performed poorly, with the return of the 10-year note down approximately 6% and the 20-year down over 7% for the year.
While I don’t believe US bonds are in a bubble, I do believe this asset class is misunderstood by many investors, who view them as absolutely safe. They are not.
I expect the US Federal Reserve Bank led by Janet Yellen to push up rates before year end.
Broadly speaking, many parts of the world are awash in debt.
That matters because it raises the risk of limiting growth, as government debt service soaks up funds that would otherwise be used for expansion, consumption, and investments.
The oversupply of bonds is deflationary and, in my opinion, may keep a lid on longer term interest rates.
US Economic Strength
That said, I believe the US economy is doing better than is widely believed.
Auto sales are strong, home sales are the highest in seven years, and jobless claims the lowest in 15 years.
Bank and home-builder stocks are breaking out and I believe we will see GDP growth above 3% in the second quarter.
As to global issues, Greece’s economy contributes 2% to the Eurozone economy. Its debt is held mostly by sovereigns and hedge funds.
Unlike the financial crisis, in which all the major banks were exposed to each other, I don’t see any contagion risk here.
To be sure there are trouble spots around the globe which is why now is a particularly good time to focus on US stocks rather than rely on a broad-based asset allocation program.
My position is that US stocks are modestly expensive, but are still supported by a number of factors: inordinate liquidity and highly accommodative monetary conditions.
A merger boomlet and low interest rates make stocks still worth a serious look in my opinion.
It has been a long time since the last meaningful correction in US stocks, and many people are calling for one.
However I think that US stocks are attractive to many global investors, and my guess would be that a significant sell-off is unlikely.
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